The 2018-19 Australian Budget


Key Points

  • The 2018-19 contains a small welcome boost to households and keeps the budget on track for a surplus.

  • The main risk is that the revenue boost seen this year is not sustained & the budget continues to have relatively optimistic assumptions regarding revenue growth.

  • The impact on the RBA and shares is likely minimal.

Introduction

The 2018-19 Budget will be the last before the next election (due by May 2019) and so had to provide pre-election goodies but in a way that keeps the return to surplus on track. Thanks to an improvement in the budget position since the Mid-Year review, of around $7bn per annum, this has been made relatively easy. A modest fiscal stimulus will help households, but the main risk is that the revenue boost proves temporary.

Key Budget Measures

As always, most of the measures in the Budget were pre-announced or leaked. The goodies include:

  • Income tax cuts from July for low to middle income earners of up to $10 a week which is mainly achieved by lifting the Low Income Tax Offset and raising the $87,000 tax threshold to $90,000.

  • A plan for broader tax cuts starting in 2022, which from 2024 includes removing the 37% tax bracket and having the 32.5% tax bracket go all the way up to $200,000.

  • Dropping the planned 0.5% Medicare levy increase.

  • Ongoing commitment to cut the corporate tax rate to 25% for large companies by 2026-27.

  • Extension of the small business instant asset write off.

  • Increased spending on home aged care, various concessions for older Australians related to superannuation contributions and work tests, more hospital funding and new products listed on the Pharmaceutical Benefits Scheme.

  • An extra $25bn in infrastructure spending including the Melbourne rail link, Bruce Highway, Gold Coast/Brisbane M1, road and rail in WA and North-South Corridor in SA.

This is only partly offset by various savings including an illicit tobacco tax and the usual tax integrity measures to target the black economy and multinational tax avoidance.

Implications for the RBA

While this Budget should provide some boost to confidence – for which the next two months’ confidence figures should be watched closely, the fiscal boost to the economy and household income is modest with the latter only showing up sometime in second half 2019. So it’s unlikely to be enough to speed the economy up. As such, we see no reason to change our view that the RBA will remain on hold out to 2020.

Implications for Australian assets

Cash and term deposits – with interest rates remaining low, returns from cash and bank term deposits will remain low. Bonds – a major impact on the bond market from the Budget is unlikely. With Australian five year bond yields at 2.4%, it’s hard to see great returns from bonds over the next few years albeit Australian bonds will likely outperform US/global bonds. Shares – the potential boost to confidence from this Budget could be a small positive for the Australian share market. But it’s hard to see much impact on shares. Property – the Budget is unlikely to have much impact on the property market. Interesting to note that the 2017 budget saw an effort to encourage retirees to sell the family home whereas this year there are measures to help them stay in it! We expect Sydney and Melbourne home prices to fall further. Infrastructure – continuing strong infrastructure spending should in time provide more opportunities for private investors as many of the resultant assets are ultimately privatised. The $A – the Budget alone won’t have much impact on the $A. With the interest rate differential in favour of Australia continuing to narrow the downtrend in the $A has further to go.

Concluding comments

The 2018-19 Budget has a sensible focus on providing a small boost to households (with the full impact of tax cuts not occurring until next decade) and to infrastructure at the same time as maintaining a return to surplus. The main risks are around whether the recent revenue windfall to the budget proves temporary and the assumptions for continued strong revenue growth.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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© 2019 by Valley Mayfair Wealth Management

Valley Mayfair Pty Ltd ACN 160 365 686, trading as Valley Mayfair Wealth Management, is an authorised representative and credit representative of Hillross Financial Services Limited ABN 77 003 323 055, Australian Financial Services Licensee (232705) and Australian Credit Licensee (232705)

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This website contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.